ERIC L. FRANK, Chief Bankruptcy Judge.
The dispute giving rise to this adversary proceeding stems from the sale of the assets
The debtor in the above-captioned bankruptcy case, Nicholas Bayer ("N. Bayer"), was the officer/director (and shareholder) of SCI and the driving force behind the SCI-SCW transaction. He later became an officer of SCW. Plaintiffs John Larson ("Larson") and Greg Bayer ("G. Bayer") (Larson and G. Bayer collectively, "the Plaintiffs"), shareholders of SCI, claim that N. Bayer was motivated by a promised employment contract with SCW and that he breached his state law based fiduciary duty to SCI because the SCI-SCW transaction stripped SCI of all of its assets without any recompense to SCI (and its shareholders). In their capacity as shareholders of SCI, the Plaintiffs claim that SCI holds a nondischargeable claim against N. Bayer, primarily under § 523(a)(4), which excepts from a debtor's discharge any debt "for fraud or defalcation while acting in a fiduciary capacity."
On the record presented, I find that N. Bayer was not a "fiduciary" to SCI (and indirectly, to its shareholders, including Larson and G. Bayer) as that term is used in 11 U.S.C. § 523(a)(4). Therefore, the Plaintiffs' § 523(a)(4) claim must fail. Further, as elaborated below, the Plaintiffs' remaining claims (under § 523(a)(2) and, possibly, § 523(a)(6)) were waived or have no merit. Consequently, the Plaintiffs are not entitled to a determination of nondischargeability and judgment will be entered in N. Bayer's favor on all claims.
On February 6, 2012, N. Bayer filed a voluntary chapter 7 petition. The chapter 7 Trustee determined that this was a no-asset case. On May 10, 2012, the Plaintiffs timely filed this adversary proceeding against N. Bayer, seeking a determination that the claims they asserted in a pre-petition Illinois state court action are nondischargeable.
The Plaintiffs filed a similar adversary action against another debtor, Joseph Grasso ("Grasso") arising from the same operative facts. See Adv. No. 12-0378. Grasso's main bankruptcy case is on the docket of my colleague, Hon. Magdeline D. Coleman. Grasso was one of the principals of SCW, the purchasing entity in the SCI-SCW transaction. Due to the common issues of fact with respect to Larson's and G. Bayer's claims against N. Bayer and their claims against Grasso, Judge Coleman assigned Adv. No. 12-0378 to my docket, where I consolidated the two (2) adversary proceedings for trial.
On January 11, 2013, the parties filed their Joint Pretrial Statement. (Adv. No. 12-0379, Doc. #22; Adv. No. 12-0378, Doc. # 18). With respect to N. Bayer, the Joint Pretrial Statement states, in Part IV: "Plaintiff merely seeks a determination as to whether the pending Illinois State Court Claim should be held nondischargeable under 11 U.S.C. § 523(a)(2) and/or § 523(a)(4)." (Adv. No. 12-0379, Doc. #22).
I held a trial of the consolidated adversary proceedings on December 12 and 13, 2013. (Docket Entry No. 50).
One particular aspect of the trial requires mention. After the conclusion of the Plaintiffs' case-in-chief, the Defendants moved for a directed verdict. A lengthy colloquy ensued, during which I expressed the view that a claim under 11 U.S.C. § 523(a)(6) may have been tried by consent, see Fed.R.Civ.P. 15(b)(2). (2 N.T. at 20-21, 31-34, 54-58).
After the conclusion of the trial, the parties filed post-trial briefs, the last of which was filed May 15, 2014. (Doc. #'s 70, 71).
_______________________________________________________________________________ Shareholder Number of Shares in 9/2006 Number of Shares in 6/2007 _______________________________________________________________________________ Lin Bayer 17,500 500,000 _______________________________________________________________________________ David Lee 17,750 1,000,000 _______________________________________________________________________________ Dave Bayer 0 500,000 _______________________________________________________________________________ Shane Reinhart 0 500,000 _______________________________________________________________________________
(2 N.T. at 113-114; Ex. P-1).
The Bankruptcy Code seeks to promote two core policies: providing debtors with a fresh start and maximizing the equitable distribution of property to creditors. See, e.g., In re WR Grace & Co., 729 F.3d 332, 346 (3d Cir.2013). However, the fresh start policy has certain limitations; not all debts are dischargeable. Based on various competing policy concerns, see, e.g., In re Janc, 251 B.R. 525, 543-44 (Bankr. W.D.Mo.2000), Congress has carved out express, statutory exceptions to the discharge. See 11 U.S.C. § 523(a). These exceptions are construed strictly against creditors and liberally in favor of debtors. E.g., In re Cohn, 54 F.3d 1108, 1113 (3d Cir.1995); In re Vidal, 2012 WL 3907847, at *15 (Bankr.E.D.Pa. Sept. 7, 2012).
Generally speaking, for a debt to be nondischargeable under § 523(a), the plaintiff must establish two (2) elements. The debt itself must be valid and the debt must satisfy all of the requirements of one of the subsections of § 523(a). See In re August, 448 B.R. 331, 346-47 (Bank. E.D.Pa.2011) (citing cases).
A creditor objecting to the dischargeability of an indebtedness bears the burden of proof. Cohn, 54 F.3d at 1113; In re Bittar, 2012 WL 1605160, at *2 (Bankr.D.N.J. May 8, 2012). The creditor must establish the nondischargeability of a debt by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Cohn, 54 F.3d at 1113; August, 448 B.R. at 357 (citations omitted).
Section 523(a)(2) provides:
11 U.S.C. § 523(a)(2).
Courts have distinguished among the grounds for dischargeability under § 523(a)(2), i.e., false pretenses, false representations, and actual fraud. See, e.g., In re Giquinto, 388 B.R. 152, 165 n. 26 (Bankr.E.D.Pa.2008) (citations omitted); see also August, 448 B.R. at 349-50 (distinguishing between false pretenses and false representations); 4 Collier on Bankruptcy ¶ 523.08[1][d], [e] (Alan N. Resnick, Henry J. Sommer eds., 16th ed. 2009) ("Collier").
In an earlier decision, I summarized the distinctions among these § 523(a)(2) concepts as follows:
In re Ricker, 475 B.R. 445, 456 (Bankr. E.D.Pa.2012) (citations omitted).
In order for a debt to be determined nondischargeable under § 523(a)(2)(A) based on false pretenses or false representations, a plaintiff must prove that:
Section 523(a)(4) provides that a debtor will not be discharged from any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]"
Section 523(a)(4) renders nondischargeable three (3) distinct types of debts: (1) certain debts arising while the debtor was acting in a fiduciary capacity; (2) debts arising from embezzlement; and (3) debts arising from larceny. In this adversary proceeding, the Plaintiffs invoke the first category under § 523(a)(4): the fiduciary prong.
To prevail under the fiduciary prong of § 523(a)(4), a plaintiff first must prove that the debtor was acting in a fiduciary capacity. Once the threshold fiduciary relationship has been established, a plaintiff must then prove fraud or defalcation. Fraud involves "intentional deceit, rather than implied or constructive fraud." In re Tyson, 450 B.R. 514, 522 (Bankr. E.D.Pa.2011) (citations omitted). Defalcation is the failure to fully account for funds handled in a fiduciary capacity. See, e.g., In re Pearl, 502 B.R. 429, 440 (Bankr. E.D.Pa.2013). Recently in Bullock v. BankChampaign, N.A., the Supreme Court held that defalcation requires a level of scienter "involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." ___ U.S. ___, 133 S.Ct. 1754, 1757, 185 L.Ed.2d 922 (2013).
The critical issue in this case is whether N. Bayer was acting as a fiduciary in connection with the asset sale transaction that gives rise to the Plaintiffs' claims. The term "fiduciary" has a specialized meaning under § 523(a)(4) and I will return to the subject in a more fulsome discussion in Part V.B.3.a.-c., infra.
Section 523(a)(6) of the Bankruptcy Code excepts from discharge any debt for "willful and malicious injury by the debtor
A willful injury is an injury that is done deliberately or intentionally. In re Coley, 433 B.R. 476, 497 (Bankr.E.D.Pa. 2010) (citing Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)). Case law in the Third Circuit instructs that "actions taken for the specific purpose of causing an injury as well as actions that have a substantial certainty of producing injury are `willful' within the meaning of § 523(a)(6)." Coley, 433 B.R. at 497 (citing In re Conte, 33 F.3d 303, 307-09 (3d Cir.1994)).
"Malice does not mean the same thing for nondischargeability purposes under § 523(a)(6) as it does in contexts outside of bankruptcy." In re Wooten, 423 B.R. 108, 130 (Bankr.E.D.Va.2010) (citation omitted); see also Conte, 33 F.3d at 308. No specific showing of actual malice is required. Conte, 33 F.3d at 308 (citing St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1009 (4th Cir. 1985)). "In bankruptcy, debtor may act with malice without bearing any subjective ill will toward plaintiff creditor or any specific intent to injure same." Wooten, 423 B.R. at 130 (citation omitted); see also Vidal, 2012 WL 3907847, at *28. Rather, malice encompasses an injury that is "wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will." In re Jacobs, 381 B.R. 128, 136, 138-39 (Bankr.E.D.Pa.2008) (quoting 4 Collier on Bankruptcy ¶ 523.12[2] (15th rev. ed. 2007)). Malice may be established by the debtor's actions as well as the surrounding circumstances. Jacobs, 381 B.R. at 137; accord St. Paul Fire & Marine Ins. Co., 779 F.2d at 1010 ("Implied malice, which may be shown by the acts and conduct of the debtor in the context of their surrounding circumstances, is sufficient under 11 U.S.C. § 523(a)(6)").
The Plaintiffs' nondischargeability claim is based, essentially, on their allegation that N. Bayer engineered the asset sale transaction for his own benefit, in violation of his duty to act in the best interest of SCI and its shareholders. To carry out this asserted "scheme," the Plaintiffs claim that N. Bayer: (1) issued shares in SCI to friendly third-parties in a purposeful effort to dilute the voting power of shareholders, such as the Plaintiffs, who were likely to oppose the sale transaction; and (2) concealed material facts from the shareholders, such as the terms of the proposed transaction and N. Bayer's future employment with the purchasing entity.
That said, the Plaintiffs' legal claims and arguments throughout this proceeding have not been presented with much precision. For example, their joint post-trial brief did not differentiate between the respective claims of Larson and G. Bayer, did not identify the elements required to establish dischargeability under any applicable provisions of the Bankruptcy Code and did not explain how those elements were satisfied by facts developed in the evidentiary record. Rather, the Plaintiffs seem to have assumed (incorrectly) that the cause of action for breach of fiduciary duty by a corporate officer or director under state law corresponds to "fraud or defalcation while acting in a fiduciary capacity" under 11 U.S.C. § 523(a)(4). Also unexplained is the Plaintiffs' reference in the Amended Complaint to themselves as plaintiffs suing "individually and on behalf of [SCI]." Therefore, to analyze properly the issues before me, I find it necessary to
In the Amended Complaint, Larson asserted that his claim against N. Bayer is nondischargeable under §§ 523(a)(2) and (a)(4).
Reading the Amended Complaint and the Joint Pretrial Statement together, I understand Larson to assert: (1) an individual claim under § 523(a)(2) based on his personal rights embodied in the Separation Agreement; and (2) a derivative claim (along with G. Bayer) on behalf of SCI under § 523(a)(4) that N. Bayer committed a nondischargeable breach of fiduciary duty to the corporation. (1 N.T. at 205; see also 2 N.T. at 50 (counsel stating that any recovery on the Plaintiffs' claims "goes to SCI")).
One other potential claim must be considered: a potential nondischargeability claim under § 523(a)(6) that arguably was tried by consent. See Part II.C, supra.
N. Bayer acquired Larson's voting proxy through the September 13, 2006 Separation Agreement. Thus, the terse statement in the Joint Pretrial Statement, that Larson's § 523(a)(2) claim is based on "[N. Bayer's] actions in acquiring the voting rights to [Larson's] shares," (Jt. Pt. Stmt. ¶ V.A.1.), suggests that Larson's legal theory is that N. Bayer fraudulently induced him into entering into that agreement.
Larson presented no evidence in support the § 523(a)(2) claim at trial. In his testimony, Larson referred only to such concepts as "breach of fiduciary duty," "tortious interference," "conspiracy" and "breach of the September [Separation] Agreement." (1 N.T. at 205-07). The record is devoid of any evidence that N. Bayer made any factual misrepresentations or intended to deceive Larson at the time of the entry into the Separation Agreement, both necessary elements of a § 523(a)(2) claim. See Part IV.B., supra. Nor did Larson address the § 523(a)(2) claim in his post-trial brief.
In this case, based upon the lack of evidence presented at trial and the complete omission of any argument in support of § 523(a)(2) in post-trial briefing, I am satisfied that Larson abandoned the claim. See Laramie Associates, 1997 WL 67848, at *12. Alternatively, I conclude that Larson has not met his burden of proof on the claim by failing to present any evidence of factual misrepresentations or an intent to deceive. Therefore, I will enter judgment in favor of N. Bayer and against Larson on the § 523(a)(2) claim.
Larson's § 523(a)(4) claim is a derivative claim brought on behalf of SCI. To have standing to maintain a derivative action, a shareholder must establish, inter alia, that he or she was "a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time." Ga.Code § 14-2-741(1). However, Larson's shareholder status during the relevant time period is hardly clear. Larson may not have been a shareholder of SCI when the asset sale transaction occurred.
At the shareholder meeting, G. Bayer asserted that Larson sold his shares to him just prior to the meeting. On this basis, the Plaintiffs have long contended that N. Bayer had no right to use the Larson proxy at the meeting. This contention gives rise to other questions. How could Larson transfer his shares to G. Bayer without first giving SCI the first option, as provided in the Separation Agreement?
Rather than resolve these issues, upon which the parties have barely touched, I will assume arguendo, for purposes of resolving Larson's § 523(a)(4) claim, that Larson remained a shareholder of SCI and I will evaluate the claim on the merits. I defer my discussion of the merits Larson's § 523(a)(4) claim to Part V.B.3., infra, where I will discuss it in conjunction with G. Bayer's § 523(a)(4) claim.
Assuming arguendo that Larson was a SCI shareholder at the relevant time, his potential § 523(a)(6) claim, see Part II, supra, is an offshoot of the Plaintiffs' core theory of the case, as articulated in their post-trial brief, i.e., that:
(Plaintiffs' Post-Trial Brief at 2, 7) (Doc. #70).
The entire discussion in the Plaintiffs' brief is couched entirely in terms of N. Bayer's alleged breach of fiduciary duty under nonbankruptcy law. The brief no-where mentions § 523(a)(6) in connection with the Plaintiffs' claims against N. Bayer. This could not have been an oversight. Indeed, within the same brief, Larson pressed a § 523(a)(6) claim against Grasso.
Based upon the absence of any reference to § 523(a)(6) in the Amended Complaint and the Joint Pretrial Statement and the complete omission of any argument in support of § 523(a)(6) in post-trial briefing, I find that Larson's § 523(a)(6) claim against N. Bayer is waived. Laramie Associates, 1997 WL 67848, at *12.
Judgment will be entered in favor of N. Bayer and against Plaintiff Larson under § 523(a)(6).
The Amended Complaint did not distinguish G. Bayer's claims from Larson's. Thus, his claims, too, were based on 11 U.S.C. §§ 523(a)(2) and (a)(4), with the latter claim being brought derivatively on behalf of SCI. In the Joint Pretrial Statement, however, G. Bayer limited his claim to § 523(a)(4). Thus, any § 523(a)(2) claim was abandoned, leaving only the § 523(a)(4) claim and, possibly, a § 523(a)(6) claim.
In the post-trial briefing, G. Bayer addressed only his § 523(a)(4) against N. Bayer.
Judgment will be entered in favor of N. Bayer and against Plaintiff G. Bayer under 11 U.S.C. § 523(a)(6).
In dischargeability proceedings under 11 U.S.C. § 523(a)(4), it is sometimes difficult to ascertain whether a debtor was acting "in a fiduciary capacity" within the meaning of the Bankruptcy Code. The determination requires consideration of three (3) sources that bankruptcy courts consult in rendering decisions in § 523(a) proceedings: (1) the facts regarding the nature of the relationship between the debtor and the creditor; (2) the treatment of the debtor-creditor relationship under applicable nonbankruptcy law; and (3) historic bankruptcy dischargeability policy under § 523(a)(4). These sources may push and pull a court in different directions.
As explained below, I conclude that the Plaintiffs have not established that N. Bayer was acting in a fiduciary capacity when Plaintiffs' (disputed) claim against him arose. Therefore, the § 523(a)(4) claim is without merit.
The rationale for the nondischargeability of debts for fraud or defalcation while acting in a fiduciary capacity, see 11 U.S.C. § 523(a)(4), was summarized by one Court of Appeals as follows:
Matter of Marchiando, 13 F.3d 1111, 1115 (7th Cir.1994) (per Posner, J.).
Historically, the United States Supreme Court has instructed that the term "fiduciary," as it is used in § 523(a)(4), is to be construed narrowly. As far back as 1934, the Court stated that "the statute speaks of technical trusts, and not those which the law implies from the contract." Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (internal quotations and citation omitted). See also Upshur v. Briscoe, 138 U.S. 365, 375, 11 S.Ct. 313, 34 L.Ed. 931 (1891) ("Within the meaning of the exception in the bankruptcy act, a debt is not created by a person while acting in a `fiduciary character,' merely because it is created under circumstances in which trust or confidence is reposed in the debtor, in the popular sense of those terms").
Thus, the term "fiduciary capacity generally has a narrower meaning in bankruptcy than its traditional common law definition." In re Dawley, 312 B.R. 765, 777 (Bankr.E.D.Pa.2004) (internal quotations
In determining whether the requisite fiduciary relationship exists, bankruptcy courts look "for guidance" to applicable nonbankruptcy state law.
A fiduciary relationship exists under § 523(a)(4) if an express or technical trust is present. E.g., 4 Collier at ¶ 523.10[1][d]; Coley, 433 B.R. at 495 (citing authorities). An express trust is one "created with the settlor's express intent, usually declared in a writing." In re Thompson, 458 B.R. 504 (8th Cir. BAP 2011) (quoting Blacks Law Dictionary 1650 (9th ed. 2009) (alterations omitted)); accord In re Keogh, 509 B.R. 915, 933 (Bankr.E.D.Mo.2014) (same). A technical trust is usually described as one created by statute or common law. E.g., Keogh, 509 B.R. at 933.
Further, under § 523(a)(4), the trust relationship must pre-exist the alleged defalcation or fraud. Neither a constructive trust nor a resulting trust, each of which is imposed as a matter of law
The typical elements of an express trust under applicable nonbankruptcy law are:
Similarly, a technical trust created by statute or common law must:
The precise issue in this adversary proceeding is whether N. Bayer was a fiduciary to SCI and its shareholders, for purposes of 11 U.S.C. § 523(a)(4), by virtue of his status as an officer and director of SCI. The determination of this issue requires consideration of state law. Accordingly, the first question is: what state's substantive law should be considered?
The parties have not addressed this issue.
Generally, a federal court applies the choice-of-law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); accord In re Dombroski, 478 B.R. 198, 203 (Bankr.M.D.Pa. 2012); In re Buffalo Molded Plastics, Inc., 354 B.R. 731, 750 (Bankr.W.D.Pa.2006). I must apply Pennsylvania's choice of law principles because this court sits in Pennsylvania. E.g., In re Eagle Enterprises, Inc., 223 B.R. 290, 292 (Bankr.E.D.Pa. 1998) (stating that bankruptcy courts generally "rely on the rule observed by federal district courts hearing diversity cases and use the choice of law rules of the forum state.").
Pennsylvania employs a two (2) step choice of law analysis. The first step is to determine whether a "false conflict" exists. See LeJeune v. Bliss-Salem, Inc., 85 F.3d 1069, 1071 (3d Cir.1996). Where the application of the law of two (2) jurisdictions does not produce different results on an
The two (2) states with interests in this matter are Georgia (the state of SCI's incorporation) and Illinois (the parties' home state when the state court complaint was filed).
The Georgia Business Corporation Code requires officers and directors to discharge their duties "in good faith," "in the best interests of the corporation," with the care of "an ordinarily prudent person in a like position." Ga.Code §§ 14-2-830(a), 14-2-842(a) (providing the standards of care for directors and officers).
The Illinois Business Corporation Act of 1983, 805 I.L.C.S. §§ 5/1.01-5/17.05, is not as explicit as the Georgia Business Corporation Code in delineating the duties of corporate officers and directors. However, case law confirms that corporate officers and directors are obliged to act with loyalty and good faith in managing the corporation. E.g., Star Forge, Inc. v. F.C. Mason Co., 2014 WL 2042045, at *3 (Ill. App. 2d Dist. May 16, 2014); Tully v. McLean, 409 Ill.App.3d 659, 350 Ill.Dec. 434, 948 N.E.2d 714, 739 (1st Dist.2011); Coduti v. Hellwig, 127 Ill.App.3d 279, 82 Ill.Dec. 686, 469 N.E.2d 220, 230 (1st Dist. 1984). These duties mandate that corporate officers and directors work for the good of the corporation and refrain from putting their personal interests ahead of the good of the entity. E.g., Unichem Corp. v. Gurtler, 148 Ill.App.3d 284, 101 Ill.Dec. 400, 498 N.E.2d 724, 727 (1st Dist. 1986); see also In re Haughey, 2005 WL 3077227, at *5 (Bankr.N.D.Ill. Nov. 15, 2005) (corporate officers "have duties of good faith, loyalty, and honesty; and may not enhance their personal interests at the expense of the corporation's interests").
The above recitation indicates that Georgia and Illinois law impose similar duties on corporate officers and directors in relation to the shareholders of the corporation. I perceive no material difference between the law of the two jurisdictions. In both states, corporate officers and directors owe the corporation a duty of loyalty and good faith. Thus, there is a false conflict and I am free to consult the law of either Illinois or Georgia interchangeably in seeking guidance in applying 11 U.S.C. § 523(a)(4). See, e.g., Lucker Mfg. v. Home Ins. Co., 23 F.3d 808, 813 (3d Cir.1994).
Much judicial ink has been spilled on the issue presented in this adversary proceeding: whether a corporate officer/director is a fiduciary to the corporation under 11 U.S.C. § 523(a)(4). Most of the case law begins with the same reference point insofar as the law governing duties of corporate officers and directors in many, if not all, jurisdictions mirrors the law in Georgia and Illinois. Yet, the reported case law under § 523(a)(4) is hopelessly divided
Given that the relevant corporate law is that of Georgia and Illinois, I first consider the case law from the courts that have decided § 523(a)(4) proceedings based on the law of those two (2) jurisdictions.
The reported bankruptcy decisions from Georgia federal courts have held that a debtor's status as an officer or director of a Georgia corporation does not, by itself, create a fiduciary relationship between the officer or director and the corporation within the meaning of 11 U.S.C. § 523(a)(4).
Matter of Woldman, 92 F.3d 546, 547 (7th Cir.1996). However, Marchiando also includes the following passage:
13 F.3d at 1116 (emphasis added).
In Frain, a later Seventh Circuit decision, the court gave several examples of relationships in which the "inequality of power" justifies treating one party as a fiduciary: "a lawyer-client relation,
Since Frain, Illinois bankruptcy courts regularly cite or quote the passage from Frain stating that the director-shareholder relationship is a fiduciary one. These references are dicta, however, because the cases did not involve officer or director/shareholder disputes.
Thus, it is not possible to describe definitively the state of § 523(a)(4) law in the Illinois federal courts. As I read the decisions, Illinois federal courts have held that an Illinois corporate officer director is either: (1) a § 523(a)(4) fiduciary as a matter of law; or (2) a § 523(a)(4) fiduciary only if a factual record establishes that the debtor was in a "position of ascendancy" compared to the other corporate managers.
The recitation above illustrates that there are three (3) lines of cases on this issue of federal bankruptcy law that is before this court.
The first line of cases holds that the duties imposed by state statute on a corporate officer and director are sufficiently similar to traditional fiduciary duties as to warrant treating a corporate officer or director as a fiduciary to the corporation (and, according to some courts, as a fiduciary to creditors upon insolvency of the corporation) under 11 U.S.C. § 523(a)(4). These courts perceive the corporate assets as a whole as constituting a trust res being managed and controlled by the officers and directors for the benefit of the corporation (i.e., the shareholders) or, in the case of insolvency, the creditors of the corporation.
The second line holds that the statutorily imposed duty of loyalty and good faith that a corporate officer and director owes to the corporation is insufficient, by itself, to make a corporate officer and director a fiduciary within the meaning of § 523(a)(4). Cases adopting this approach emphasize the historically limited definition of fiduciary in § 523(a)(4) and the absence of an identifiable trust res. They perceive the duty of a corporate officer or director as being similar to the generalized duty of good faith and fair dealing that any party to a contract owes the other party. They also reject the notion that the corporate assets as a whole, managed by the officer or director to generate corporate profits, constitute a trust res for purposes of § 523(a)(4).
A third line of cases rejects either per se rule. These cases suggest that a fiduciary relationship under § 523(a)(4) can be
After careful consideration, I am persuaded by and will follow the reported decisions on the issue from this bankruptcy district, at least insofar as they reject the first line of cases. See Dawley, 312 B.R. at 778-79; Johnson, 242 B.R. at 294. In other words, I reject the per se rule that corporate officers or directors are fiduciaries in jurisdictions in which their obligations are those of loyalty and good faith.
This still leaves open whether there is a per se rule that officers or directors are not § 523(a)(4) fiduciaries or whether the issue must be determined case-by-case. In this adversary proceeding, I find it unnecessary to make that choice. Even under the more expansive test for fiduciary status (the third line), the Plaintiffs have not established that N. Bayer was a fiduciary under § 523(a)(4).
The record in this case lacks the essential elements of the severe imbalance of power that is the hallmark of the more expansive view of the bankruptcy term fiduciary that has been adopted in the Seventh Circuit.
Until either mid-2006 or September 2006, both Plaintiffs had been active in the management and operations of SCI. There was no obvious imbalance in expertise between N. Bayer and the Plaintiffs. True, after September 2006, neither Plaintiff was actively involved in SCI and therefore, both were dependent on N. Bayer (who was the sole officer and director) for information regarding the status of the company. But, his control of business operations by itself is insufficient to establish the type of domination required to under the third line of § 523(a)(4) cases. See Frain, 230 F.3d at 1017 ("natural advantage" derived from control of day-to-day business decisions of the corporation "not sufficient in itself to establish a position of ascendancy"); see also In re Pawlak, 467 B.R. 462, 475 (Bankr.W.D.Wis.2012) (in LLC context, debtor lacked "the sort of `ultimate power' or unequal control required for him to have a `position of ascendancy' for purposes of § 523(a)(4)").
Nor did the Plaintiffs establish that they were precluded in any way from obtaining corporate information. If anything, the record shows that N. Bayer "kept them in the loop" regarding the status of the most important corporate decisions—obtaining critical financing for SCI during the period of time in which SCI was in negotiations with Grasso and Meakim. (See Ex. P-40; 1 N.T. at 138-39).
Further, even though N. Bayer was the sole officer and director, the corporate transaction at issue here (the asset sale to the new entity created by Grasso and Meakim) required a shareholder vote. N. Bayer did not hold a majority of the voting shares. Even with the disputed proxy that he received from Larson, it was not a foregone conclusion that N. Bayer could control that vote.
In short, while N. Bayer certainly wielded considerable power in SCI as its sole officer and director, I do not perceive the level of domination of the company necessary to render him a fiduciary under § 523(a)(4).
I am aware that the Plaintiffs assert that N. Bayer kept critical information from them and otherwise acted in an oppressive
I conclude that the acts of which the Plaintiffs complain did not occur during the course of a fiduciary relationship. Therefore, it follows that the Plaintiffs have not established an essential element of their § 523(a)(4) claim.
For the reasons set for above, judgment will be entered in favor of the Defendant N. Bayer and against the Plaintiffs in this adversary proceeding. An appropriate order follows.
1. Judgment is entered in favor of the Defendant Nicholas Bayer and against the Plaintiffs John Larson and Greg Bayer under 11 U.S.C. §§ 523(a)(2), (4) and (6).
2. Any debt owed by Debtor Nicholas Bayer arising from his conduct as an officer and director of Saxby's Coffee, Inc. in connection with the sale of its assets to Saxby's Coffee Worldwide, LLC in 2007 is
The Amended Complaint did not tie these state law claims to any particular nondischargeability provision of the Bankruptcy Code. This is discussed further in n. 18, infra.
Count III of the State Court complaint states a claim for fraudulent inducement by Larson individually against SCI and N. Bayer in connection with the Separation Agreement. The incorporation of this state law claim probably was intended to align with Larson's nondischargeability claim under § 523(a)(2).
Count IV of the State Court complaint asserts a claim for breach of fiduciary duty by N. Bayer. Count VI is a claim for civil conspiracy. The Amended Complaint's reference to these claims probably relates to the § 523(a)(4) claims.
I also note that the Plaintiffs assume that rescission of the Separation Agreement would reverse the effect of an irrevocable proxy invoked prior to rescission. Perhaps so, but perhaps not.
Docteroff is inapposite for two (2) other reasons. First, the relationship at issue was between a director and a creditor of an insolvent subsidiary corporation (not between an officer and director and his own corporation). See Docteroff, 133 F.3d at 216-17. Second, the bankruptcy court and the Third Circuit appeared to be applying Washington law, while the preceding sub judice involves a director/shareholder relationship under Illinois law. See id. at 216 n.2.
I note that the reported Pennsylvania bankruptcy court decisions align in manner similar to the Georgia courts. The more recent decisions hold that a corporate officer or director is, not per se, a fiduciary to the corporation under § 523(a)(4). Compare Dawley, 312 B.R. at 778-79; In re Johnson, 242 B.R. 283, 294 (Bankr.E.D.Pa.1999); In re Ramonat, 82 B.R. 714, 718-20 (Bankr.E.D.Pa. 1988), with Wolfington, 48 B.R. at 924. There also is division on the related issue whether the state law fiduciary obligation a corporate officer or director owes to creditors upon corporate insolvency is a fiduciary relationship under § 523(a)(4). Compare In re Bagel, 1992 WL 477052, at *16 (dictum in that the case involved a corporate liquidating agent, not a corporate officer or director), with In re Clayton, 198 B.R. 878, 882-83 (Bankr.E.D.Pa. 1996) (not a per se fiduciary to the creditors under § 523(a)(4)).
